Why I View the Blue Chip Retrenchment as a Good Thing

By Monday, September 9, 2013

companyMany of the stock market’s leading stocks (mostly blue chips) have been pulling back recently, even in the face of rising key stock indices. This is both a telling and healthy development for a market that’s been due for a meaningful retrenchment for a long time.

While a lot of the stock market’s best-performing blue chips aren’t too far off of their highs, there’s definitely been some repositioning going on among institutional investors. This is a possible indicator that the stock market is now rotating out of its safest names that have been performing so well this year. It very much is an equity market dynamic worth following.

One of my favorite stocks for long-term investors seeking dividends is Colgate-Palmolive Company (CL). This is not a burgeoning biotechnology stock, but that’s not the point. If you can get a 10% total return, including dividends, in a year from a company that isn’t going to go broke in the next recession, well, that’s meaningful for a stock market investor who is saving for or is already in retirement.

Colgate-Palmolive is five points off its all-time record high set in May of this year. The stock’s current dividend yield is 2.4%, and its trailing price-to-earnings (P/E) ratio is 24, which many may argue is pricey.

This is a company that has a long-term track record of solid business execution and not surprising Wall Street on the downside. It’s the kind of company worth considering on major retrenchments.

Another favorite of mine for long-term stock market investors is PepsiCo, Inc. (PEP). It’s a better business than The Coca-Cola Company (KO), even if you prefer the taste of “Coke.”

PepsiCo has been a much more consistent company in terms of its share price performance compared to Coca-Cola. It’s also a more consistent earner, and while it’s not the fastest mature enterprise in the landscape, its track record of wealth creation including dividends is undeniable. (See “Two Important Factors Now Working Against Stocks.”) It’s a company that I think will keep on delivering on its promises. Soda and snacks continue to be a very good business.

Finally, one of my favorite benchmarks is still Johnson & Johnson (JNJ). Like many blue chips, this pharma healthcare company has experienced long periods of nonperformance on the stock market. After a sustained period of wealth creation (and this doesn’t account for dividends) in the late 1990s and early 2000s, the company traded range-bound from 2005 until 2012. Then the stock accelerated tremendously to its current level.

Johnson & Johnson is eight points off its record high set in mid-July. It has been one of the stock market’s best wealth creators in the large-cap space, and it remains, in my view, a company worth accumulating when it’s down in price.

I find the price retrenchment among many of the stock market’s leading blue chips to be a meaningful development. Combined with a reduction in quantitative easing, it’s a signal that this stock market is about to experience a change in trend.


About the Author | Browse Mitchell Clark's Articles

Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »

Sep. 3, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter) $1014.15
Trailing 12-month Price/earnings multiple (Most Recent Quarter)

17.44

Dow Jones Industrial Average Dividend Yield 2.62%
10-year U.S. Treasury Yield 2.19%

Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.

Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.

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